UPDATE: Reader Case Study: Help me help my parents!

[TansyPants]

I recently started a conversation with my parents about their retirement prospects and was somewhat startled at their situation. I thought they were doing much better. in the last 10 years they have cashed out their 401k and lived off it, built up sufficient in student loans to have a $600+ monthly payment, bought a new car and run up $40k $23k in credit card debt. I've asked them to get all their financial details together and we're sitting down next week (Sept 3) to figure out the nitty gritty details. I'll keep updating the info below as I learn more.

UPDATE: It's not as bad as I thought! I still don't have exact numbers for a few things, but I've added exact numbers and closer estimates below.

I'd specifically like options for reducing the interest paid on the credit card debt, is a debt consolidation/personal loan/transfer to a 0%CC even an option with their credit?

Mum: 56, Dad: 67. Married, filing together. Live in the greater NYC area.
Credit score: 620

Mum works full time for the city government: $107k
Dad runs a business as an arboricultural consultant: $20-40k Variable, seasonal work.

Neither of them have an IRA, HSA or 401k. They do own 38 shares in a company my mum used to work at (currently worth about $2200) and 600 shares of uranium, worth a grand total of $90. I think the ideal situation is to sell these and throw the proceeds at the debt?

Update: Dad refuses to sell Uranium shares at a loss, so those will just chill. The others are still under discussion ("They might be worth more in a few months, the market is pretty bumpy right now.")

Mum's job comes with a pension. She's been there less than a year, is contributing some amount and I have no idea what the employer match/fees/fund information is. Still waiting on this info.

Dad receives 410Euro a month from his Dutch pension. At the moment I believe that sits in a savings account in the Netherlands and they dip into it when their budget gets tight.  I'd love to see it invested and earning something, or helping out with the debt situation. Any suggestions welcome.

Update: Dad is willing to put this into index funds, but doesn't want to move them from the Netherlands to the US, because of tax issues. Still working on this.

Dad is also eligible for his full US SS benefit (he holds a green card here) but is holding out on applying until he reaches 70, at which point he will receive 124% of the full payment. Is 24% extra starting three years from now worth paying more 22% interest on credit card debt? I'm waiting on details of how much the full benefit is. Dad is also unsure of whether there is an income cap if he receives his benefits. I have not been able to find evidence of this yet.

Update: Breakeven on using 100% SS to pay off debts now, then socking the extra funds away in a target date fund vs waiting 3 years and receiving 124% is 16-18 years. As dad is eligible for the full benefit, there is no cap on other income. He is discussing taking SS with mum now.

Mum will be eligible for SS in roughly 10 years. Also waiting on details of how much she expects to receive.

To confuse things further, they are (or will be at 65, in mums case) eligible for NZ social security payments, but there is some disagreement about whether NZ will pay them while they do not live in the country, and if they do receive the NZ money, the US may not pay, or may only pay the difference.

They own one property, a large wooden church in a small town in NZ. It's registered with the historic places trust and needs a lot of work. It is not livable (running water but no toilet or electricity, also, insufficient window area/volume ratio to be legally a dwelling)


Update:
Debt:
Car Loan: ~15,600 remaining at 2.8%
Student Loan: ~30,000. Interest rate unknown.
Credit Cards: $23,232 at ~18%

Currently, they pay a total of roughly $2350 towards debt every month. We discussed payment strategies and dad is on board with the "Avalanche" method (pay minimums on everything, plow every available dollar into the debt with the highest interest) If they continue to budget the $2350 a month, they should be debt free inside of 3 years. 2 years if dad takes SS and plows that into debt payments too.

Last year mum had a job that did not deduct income taxes. Between that and dad's company bringing in unpredictable income, they filed for an extension. Their accountant has still not provided them with the amount they owe. The extension they filed is over in October. They will have to request a payment plan or pay it with a credit card at this point.


So. Many. Face. Punches.

I've asked them to provide me with:
-a list of all debts, including minimum payment, interest rate and total balance.
-a list of all assets, across bank accounts/random old 401ks? (I have hope!)
-a list of current expenses
-a list of all income sources, and expected retirement benefits.
-the details of mum's pension plan.

Is there anything else I should get them to look into before I meet with them next week?

Thanks in advance for any help!

Update: They are flying to NZ to visit family in January. There may also be a trip to AZ next month. Any tips on helping them to see their debt as a hair on fire emergency without giving dad another heart attack? I've recommended YNAB to hopefully help them figure out where the money is going, and all those big red "Pre YNAB Debt" numbers at the top should help, right? It will certainly help with tax planning for next year!

I've also mentioned to dad the existance of IRA and SEPP accounts and suggested that once the debt is paid off he look into it in order to minimize his taxable income. He is very interested, and wishes he had known about these options before.

Thanks again to everyone who has given me feedback! I really appreciate it!

[Cassie]

I think it is great that you are helping them out before things get worse. I am sure once you have all the numbers you will get good advice.

[tonysemail]

I've kind of started down this road myself in the past month.
with high income, I don't get why your parents are in so much debt.
they'd probably be able to pay off their debt just by cutting expenses to the bare minimum.
Hopefully they are willing to make drastic changes in that direction.

my parents have much less income, so I've coached them to take the following steps:
1) call credit card companies to negotiate a lower APR
It's a few hours of tedious calling, but I estimate they will save $600 in interest.
One company offered to waive interest for 1 month instead of reducing APR.
Worth asking for since it's still a 1/12th reduction in interest.
http://www.thesimpledollar.com/how-to-lower-credit-card-interest-rate/

2) It's hard to judge how much you can trust family, but I chose to add my mom as an authorized user on my credit card.
This vastly improved her credit utilization and increased her credit score a little.
Unfortunately, she's still below 660 which is my target for her to open a chase slate card.
it seems to be a very good balance transfer card which waives the 3% transfer fee for 30 days and has 12 months 0% APR.

[MDM]

Is there anything else I should get them to look into before I meet with them next week?

If you can follow all the suggestions in http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/, that would be a good start.  Might not be sufficient, but understanding all those things could be necessary.  Offhand your 4 lists and the one set of details looks good.  They should be able to go to ssa.gov and get good projections on their SS incomes for different starting years.

Dealing with the Dutch and New Zealand issues together with the US ones gets outside the experience of most people here.  If your parents are considering moving back to either place, that increases the complexity of the options.  If they plan to stay in the US, at least you can simplify things to that case.

You are doing all the right things at this point - keep up the good work!

[TansyPants]

Thanks everyone! I really appreciate the responses!

I will update with more details later this week.

The debt seems to be largely the result of quitting work nearly ten years ago to move from the states back to NZ, Mum taking a second masters degree, Dad getting his first degree, and then a bit of waffling about what country to live in and a job search that took much longer than expected.

With their level of income I'm sure they can pay down this debt, provided they give their lifestyle a pretty severe haircut.

I expect them to be here in the States at least until mum reaches full retirement age. After that I think it will depend on the relative merits of SS vs cost of living as to which country they wind up in.

[Catbert]

At 67 your father is "full retirement" age for SS.  He can collect SS and work/earn as much as he wants w/o penalty.  Below full retirement age (e.g., people who collect at 62) there is a partial offset if they earn a salary of more than ~15K.  The break even point for postponing SS to 70 is around age 82.  If he's in better than average health and there is longevity in his family it might make sense to keep postponing.  If not, take it now and pay off those bills.

They can certainly collect SS and live in other countries - lots of retired Americans do.  Not clue how SS benefits might interact with pensions from other countries.

I think they need to decide where they'll live after retirement.  It makes no (financial) sense to keep a property in NZ if they aren't going to live there.

 

[TansyPants]

Thanks! This is super helpful :)

I suspect they will retire to NZ in the end, socialized health care and all the grand kids live over there.

In the mean time, they are flying to NZ for a holiday in January. They asked if I wanted to come, but I can't afford to. I'll save for a trip over for my brother's 40th instead.

I'm writing a program to show them how various methods of paying off debt and investing in pre vs post tax accounts will pay off. Hopefully it helps.

[Rosy]

^^^ I agree about the SS - your dad is fully eligible now and it may turn out to make sense to apply and pay off those credit card accounts. He could still continue to work, many people do that.

However, do check the rules as to whether he can receive the monies once he leaves the country. The rules vary if you are only a green card holder and not a citizen. Some countries have reciprocal agreements with the US and you end up receiving less in US SS and you definitely have to pay US taxes on your retirement payments from overseas.
There are some countries the US will not send payments too etc.

I'm trying to navigate those waters myself at present and find it rather daunting.

You might find that if you use the case study spread sheet it will help you in the sorting out process. I'll be back to see how it all shakes out - good luck!

[Greg]

I have nothing to add but to say that it's great they're willing to meet with you on the topic.  My folks are older, much worse off and won't talk to me about it, so I can't help.  They'll die in debt.  The only thing I do is make sure I don't do the same thing.

[fb132]

I have nothing to add but to say that it's great they're willing to meet with you on the topic.  My folks are older, much worse off and won't talk to me about it, so I can't help.  They'll die in debt.  The only thing I do is make sure I don't do the same thing.

You are not the only one, my parents are in full debt, they believe there's nothing that can be done to reverse it...basically they accept that they will die with debts even though I have tried to explain them that it is possible to get out of debt. I gave up convincing them, they are stubborn. They won't even reveal to me how much debt they have. They don't even have a will.

One thing I do wonder though, their only asset is their home and that is not even paid yet. The day I inherit the house (hopefully that won't happen anytime soon, I hope they live as long as possible), will debt collectors (credit card companies, etc..) come after the house???

[TansyPants]

I have nothing to add but to say that it's great they're willing to meet with you on the topic.  My folks are older, much worse off and won't talk to me about it, so I can't help.  They'll die in debt.  The only thing I do is make sure I don't do the same thing.

Man, that sucks :( At least you've learned from their mistakes, I guess!

[TansyPants]

Alright! I spoke with dad today. He didn't have all the numbers on hand, but I've updated the first post with what I've got.

Thankfully, it's not $40k in CC debt.

Unfortunately, it's $23k in CC debt and $15k in a car loan and $30k in a student loan, and a looming tax bill they don't have the funds for. Fun fun!

[lizzigee]

Your mother could contact Work and Income (the government department that handles benefits and pensions, used to be called Ministry of Social Development) to enquire about her specific situation.  I'm pretty sure NZ does not have a social security agreement with the USA which means she would have to be living in NZ at the time she qualified for superannuation to be able to apply for it if then moving overseas, and of course there are various other qualifying criteria as well. She could contact their section 'Senior Services International' to enquire about her situation (contact details listed below).

"If you'd like help and advice about overseas social security, please contact us. Our team will answer your call between 8am and 5pm Monday to Friday.
Contact us   On..
From New Zealand   Ph: 0800 777 227
Fax: 04 918 0159
From Australia   Ph: 1800 150 479
From other countries   Ph: + 64 4 978 1180
Fax: + 64 4 918 0159

Mail   
Senior Services International
Ministry of Social Development
PO Box 27178
Wellington 6141
Email   international.services@msd.govt.nz
Note: When calling from overseas replace the '+' with the international direct dial prefix for the country you're in."

[JJNL]

About your Dad's pension: this is likely to be AOW, i.e. Dutch social security. The Netherlands has a treaty with the US about social security payments, the agency supplying those will actually pay out to the US. I don't know what the tax implications will be - but it could be worth figuring out, as taxes in the US tend to be lower than in the NL, and the US also taxes citizens on income made abroad. Have your dad call the SVB (Dutch Social Security Agency) and ask them about the consequences of moving payments to the US, then also call the US tax office. This is assuming your dad speaks Dutch - their contact details are here http://www.svb.nl/int/nl/aow/contact/contact_aow_pensioen/index.jsp. BTW, even if you guys don't speak Dutch you could still try, chances are high that the person on the other side of the phone will speak enough English to help you. If it isn't just AOW, there's also another pension fund to call. Your dad can view his full pension details at www.mijnpensioenoverzicht.nl - again, in Dutch.

[Vanchica]

I, too, cannot understand why with income over $100k this is putting them under water. Dave Ramsey's "Total Money Makeover" or "Financial Peace University" would be good for them- just ignore his investment suggestions.

[TansyPants]

Thank you everyone! They're following the Avalanche method (highest interest rates first) and still working on putting together a budget. They're also flying from NY to NZ early next year and taking a trip to Arizona to see family and still not sure how the tax bill will work out.

But it's progress.

[Scandium]

What are the tax issues he's concerned about with bringing his Dutch pension over to the US? He is aware the he has to pay tax on it to the US anyway right? If he's knowingly committing tax evasion ok, that's his business. But he's following the law that money is already taxed so it doesn't matter where he keeps it.